I Bonds have been getting a lot of attention lately. They are currently paying 9.62% due to the inflation component of the interest calculation. The other part of the interest calculation is fixed. While these bonds cannot lose value, it is possible that the interest rate (due to negative inflation) could fall to zero.
What are I Bonds?
- They are low-risk and inflation-protected bonds that can earn interest for up to 30 years
- They are sold at face value with a minimum purchase of $25 if you buy online ($50 for a paper bond)
- They are non-marketable, meaning they can only be purchased through the U.S. government and cannot be sold to another investor
Who might benefit from I Bonds?
- Individuals looking to maximize interest earned on savings above your emergency fund
- Individuals who won’t need the funds for at least a year
What’s the catch?
- Minimum of 1 year ownership and if redeemed prior to 5 years, 3 months of interest is forfeited
- Interest is taxable if not eligible for the education tax exclusion; must be reported annually or can be deferred until you cash the bond or it matures
- Because the interest rate is tied to inflation, these bonds are likely attractive in the short-term and may not be competitive in the long-term, so we recommend monitoring the interest rate as inflation goes down
How do I buy them?
- You may purchase up to $5,000 in paper bonds with a federal tax refund
- Most purchases are done online here
- When you purchase online, you can buy up to $10,000 per person per calendar year
- You will need your Social Security Number, email address, and a bank account & routing number handy
You should be aware before you attempt to buy online that the Treasury Direct platform is a bit dated and can be difficult to use. Also, one of the more common issues investors face are the hurdles associated with identity verification. Don’t let this scare you off if you’re looking to optimize. Just start the process after your first cup of coffee but maybe not your third or fourth.